Investing in good companies is a smart money move.
You may not care that 8 million metric tons of plastic are thrown into the ocean each year. Or that the earth is warming at an unprecedented pace. Even if these metrics don’t hit your radar, it may interest you to know that it now pays good money to be a good steward of the planet and its people. It is possible to make great investment returns with sustainable investing and even outperform other types of investment strategies.
Here’s why it pays to get into sustainable investing.
Sustainable investing is sometimes called Impact Investing. Here are the top reasons to get into these socially responsible investing strategies.
The myth that you have to give up performance for purpose has long since been debunked. If done right, socially responsible investing does not hurt returns. In fact, with the right strategies, the opposite is usually true.
As it turns out, socially responsible funds have been on par or beating the market for decades. You do not need to sacrifice returns for purpose. The socially responsible index (MSCI KLD Social Index) has outperformed the broad market index (S&P 500) for over 20 years.
There isn’t a price to be paid for being good. In fact, the inverse may be true. There is a price to be paid for not investing in good companies. Why?
Investors are always on the look-out for ways to reduce risk.
All you need to do is take a look Enron’s cooked books, Exxon’s environmental disasters, Toshiba’s inflated profits scheme, or Wells Fargo’s fake accounts scandal to see the impact of social responsibility failures. When these scandals broke, the stock price of these companies took a massive hit. Investors and company CEOs hate headline risk and will do anything to avoid it.
This is why Environmental, Social, and Governance (ESG) factors are becoming increasingly important in valuing companies. Investors are realizing that these metrics can greatly impact company value, either positively or negatively. According to Cornerstone Research, intangible assets such as human capital, intellectual property and “brand” now represent 84% of a company’s market value.
That means you as a consumer have more power to pressure companies to do the right thing while capitalizing on your investment. Voting with your values is no longer simply the right thing to do, it is the smart thing to do.
4 ways to make money with sustainable companies.
You can now outperform the market and invest with purpose. There are several ways to invest in good companies.
1) Invest in individual companies.
Research and find your own companies with high ESG scores. This is a time-consuming process. It is also high risk because you’re putting all of your eggs in one basket. If the company does well, you win. If the company doesn’t perform, you lose. The risk sits entirely on one company.
Cost is low. The only fee is the commission to execute the trade. You’ll also need to open a brokerage account to place the trade. Robinhood Trading is a newer trading platform that now offers commission-free trades.
Time: Very High
Effort: Very High
Return: Very Low to Very High
2) Invest in socially responsible mutual funds.
Another option is to invest in a socially responsible mutual fund. There are hundreds of funds in this category. Use this tool to find and compare fund cost and performance.
The biggest issue with mutual funds is their expense. They tend to have a higher expense ratio and higher turnover. The expense ratio is the fee that the fund company charges to manage the portfolio. Turnover represents the percent of the fund assets that have been bought and sold that year. The higher the turnover rate of assets in and out of the portfolio, the higher the taxes.
Believe it or not, sometimes mutual funds both underperform and are more expensive than alternatives like ETFs (exchange traded funds). On the other hand, some funds have great thematic strategies for social responsibility investing. The good ones take a fully integrated approach to ESG investing. When the research team is strong, this could create excess returns that make the extra expense worth it. Meaning: do you care about the expense ratio that much if the fund is outperforming their peers? Bottom line: it pays to research. Doing thoughtful research will take some time.
Risk: Low to Medium
3) Invest in socially responsible ETFs.
Exchange Traded Funds, or ETFs, have become all the rage in recent years thanks to their low cost. There are 58 socially responsible ETFs, 23 of them launched this year alone. That number is likely to go up year-over-year. Like stocks and mutual funds, it pays to do your research. Make sure you’re not investing in a socially responsible ETF that simply “ticks the box” of ESG factors. Finding one that is actually making an impact can take some time.
Return: Medium to High
Risk: Low to Medium
4) Invest in impact portfolios.
Robo advisors and impact platforms combine the best of both worlds. You get the thematic approach of mutual funds at a lower cost. There are several robo advisor platforms out there, including Wealthfront, Betterment, and Wealthsimple. Some have recently introduced social responsibility portfolios.
We are also seeing the dawn of socially responsible robo advisors. Motif is a values-driven robo advisor backed by Goldman Sachs. Depending on how you feel about a big bank Wall Street backer, Motif could be an option. You’ll need $300 to start investing.
Another option is Swell Investing. Swell is an impact investing platform backed by Pacific Life. Their focus: deliver profit and purpose. With just $50, you can invest in one or more values-driven portfolios designed to impact our world in positive ways, while producing high growth. We took a good look at Swell here. Their portfolios include Green Technology, Renewable Energy, Zero Waste, Clean Water, Healthy Living and Disease Eradication.
Return: Medium to High
Start impact investing with Swell
- Anyone can join for $50
- Choose from any of their six impact portfolios, from renewable energy to disease eradication and zero waste
- No expense ratio fees or trading fees
- Very transparent and low fee structure (only one)
- You own the companies in the portfolios
- Very easy to set up with their user-friendly app and website
- Your investments are insured
- Your money grows for profit and for good
Get on your way to making a real impact with your investment dollars. Your money matters.
When we invest with our values, we can grow profit and drive positive global change.
Check out our interview with Swell Investing CEO Dave Fanger and CMO Teresa Orsolini. Our partner Pedram Shojai from Well.org had a great conversation with the Swell team about investing for growth and impact.